HDFC + LIC Housing Finance Steal the Show

July 16, 2010

HDFC Robust growth of 62% in new residential loans led to a 17% loan book growth after sell-down of some part of the loan book. While new developer loans data were unavailable, we believe overall disbursements (new loans) grew 25-30% in 1QFY11. Home loan spreads, too, grew from last year to 2.34%. Fees and capital gains are typically lumpy and hence acted as a drag on top-line growth, even though operating profits grew 24% and earnings 23%. If fee and capital gains growth had remained flat yr/yr, earnings growth could have been as high as 35%, beating the Street by 9ppts.

Retail business was stronger with a disbursement growth of 62% yoy, aided by a buoyant environment and favorable base. We believe that strong traction in mortgages will continue to drive HDFC’s earnings in the medium term.

HDFC booked dividend income of INR 1.2 bn, including dividend of INR 980 mn from HDFC Bank (pertaining to its direct holding). Dividend on indirect holding through HDFC Investments will accrue in Q2FY11. Fee income at INR 234 mn was lower than expectations as it waived charges on non-individual loans. Profit on sale of investments in IL&FS will be booked once it receives FIPB approval

Key concern remains that LICHF, like other wholesale borrowers, could see pressure on spreads as (1) incremental cost of funds rise (up 42bp qoq to 7.45% in Q1FY11) with liquidity tightening, and (2) there is limited rise in lending rates as the company maintains competitive rates (incremental yields down 52bp qoq to 9.63%) for above-industry growth rates.